CME Continues to Prohibit EFF Transactions, Despite CFTC Letter

http://markets.securitiesindustry.com/sourcemedia.securitiesindustry/news/read?GUID=14303393CME Continues to Prohibit EFF Transactions, Despite CFTC LetterThe CME Group said Monday morning that it would continue to prohibit buying and selling of Exchange for Futures contracts on its Chicago Board of Trade options and futures exchange.The announcement followed Friday's receipt by CME of a letter from the Commodity Futures Trading Commission that such transactions are "not prohibited" by either the Commodity Exchange Act or the commission.At the same time, however, the commission said that such transactions, championed by the Electronic Liquidity Exchange, "are neither prohibited nor mandated" by any core principle of commodity trading, as regulated by the CFTC."Thus, ELX’s EFFs are not prohibited by the CEA or Commission regulations,'' said the CFTC, in its letter to CME, owner of CBOT.In response, however, the CME said the "letter does not change CBOT rules, which clearly prohibit Exchange of Futures for Futures transactions (EFFs). As permitted by the Commodity Exchange Act, CBOT will continue to prohibit EFFs, which would reduce transparency and price discovery in CBOT Treasury In Exchange of Futures for Futures transactions, two different contract markets essentially swap Treasury futures from one clearinghouse to another.The CME, which also operates CME Clearing for exchange-traded contracts and CME Clearport for over-the counter derivatives, considers the exchanges of contracts to be akin to "wash sales," where a security is sold at a loss to get a tax break and then repurchased in the hope it will regain its value.In January, the ELX, which is backed by several large financial institutions, sent a letter requested the CFTC to “act promptly to effectuate its approval of the EFF rule by requiring the CBOT to permit the execution of EFFs between ELX and CBOT and prohibiting the CBOT or CME Group from threatening or bringing enforcement action in connection with the execution of EFPs.”http://www.futuresmag.com/Issues/2010/February-2010/Pages/ELX-vs-CME-Group-EFF-battle-continues.aspxhttp://www.cftc.gov/PressRoom/PressReleases/pr5872-10.htmlELX Futures is a fully regulated electronic futures exchange launched on July 10, 2009. founding firms include Bank of America, Barclays Capital, BGC Partners, Breakwater, Citi, Credit Suisse, Deutsche Bank Securities, GETCO, Goldman Sachs, JPMorgan, Morgan Stanley, PEAK6 and The Royal Bank of Scotland.ELX Futures allows for market arbitrage, outright and spread execution and cash/futures basis trading through multiple front ends and "an ultra fast matching engine. "http://www.elxfutures.com/About-ELX/Our-Company.aspxhttp://www.futuresmag.com/Issues/2010/February-2010/Pages/ELX-vs-CME-Group-EFF-battle-continues.aspxIn January, the commission found CBOT's arguments that these trades were unlawful to be "unpersuasive."http://www.elxfutures.com/getdoc/41214997-3f65-4a58-ad8a-88efd5cfa5a8/CFTC-Letter-to-CBOT-Re-Rules-and-Interpretatio-(1).aspxThe CME Group said Monday morning that it would continue to prohibit buying and selling of Exchange for Futures contracts on its Chicago Board of Trade options and futures exchange.

At the same time, however, the commission said that such transactions, championed by the Electronic Liquidity Exchange, "are neither prohibited nor mandated" by any core principle of commodity trading, as regulated by the CFTC.

"Thus, ELX’s EFFs are not prohibited by the CEA or Commission regulations,'' said the CFTC, in its letter to CME, owner of CBOT.

In response, however, the CME said the "letter does not change CBOT rules, which clearly prohibit Exchange of Futures for Futures transactions (EFFs). As permitted by the Commodity Exchange Act, CBOT will continue to prohibit EFFs, which would reduce transparency and price discovery in CBOT Treasury In Exchange of Futures for Futures transactions, two different contract markets essentially swap Treasury futures from one clearinghouse to another.

The CME, which also operates CME Clearing for exchange-traded contracts and CME Clearport for over-the counter derivatives, considers the exchanges of contracts to be akin to "wash sales," where a security is sold at a loss to get a tax break and then repurchased in the hope it will regain its value.

In January, the ELX, which is backed by several large financial institutions, sent a letter requested the CFTC to “act promptly to effectuate its approval of the EFF rule by requiring the CBOT to permit the execution of EFFs between ELX and CBOT and prohibiting the CBOT or CME Group from threatening or bringing enforcement action in connection with the execution of EFPs.”